Production and Costs | Class 12 Economics Notes

3.7.1 Short Run Costs

In the short run, some inputs are fixed, leading to fixed costs, while others are variable. Total Fixed Cost (TFC) is the cost of fixed inputs and remains constant regardless of output level. Total Variable Cost (TVC) is the cost of variable inputs and changes with output. Total Cost (TC) is the sum of TFC and TVC: TC = TFC + TVC. Table 3.3 illustrates these concepts with numerical values. Average costs are defined as cost per unit of output: Average Fixed Cost (AFC) = TFC / q, Average Variable Cost (AVC) = TVC / q, and Short Run Average Cost (SAC) = TC / q = AFC + AVC. Marginal Cost (SMC) is the change in total cost per unit change in output: SMC = ΔTC / Δq. The shapes of cost curves reflect production behaviour: TFC is constant, AFC declines as output increases (rectangular hyperbola), TVC and TC increase with output, SMC is 'U'-shaped due to the law of variable proportions, AVC is 'U'-shaped and lies below SAC, and SMC cuts AVC and SAC at their minimum points. Figures 3.3 to 3.8 illustrate these curves. Understanding short run costs is essential for firms to make production decisions.

📊 Diagram: Fig. 3.3; Table on page 10 (12×8); Fig. 3.4; Fig. 3.5; Fig. 3.6; Fig. 3.7; Short Run Costs. Short run marginal cost, average variable cost and average cost curves.

🔗 Connection: Prepares for analysis of long run costs where all inputs are variable.

Table on page 10 (12×8)